Colluding in Art
Today there are two fine-art auction houses that dominate the art market. Both Christie’s and Sotheby’s have broken world auction records for set and individual pieces of art. In May 2015 Christie’s sold Picasso’s Les femmes d’Alger for over $179 million, the highest recorded fee for any auction sold painting.
Strong competition amongst the two auction houses led to a situation of imperfect market competition where both auction-houses were not reaping their highest profit potential. As a result both auction houses tacitly colluded in the 1990’s by setting the same fixed commissioned prices to their buyers and sellers. This gave both houses the freedom to raise their set prices to buyers and sellers as the market for auctioned fine art is relatively price-inelastic given Sotheby’s and Christie’s market dominance.
There are dire consequences to operating illegal price-fixing cartels and when discovered in 2002, Sotheby’s were made to pay a heavy fine of €20 million by the EU (BBC, 2002). Christie’s on the other hand managed to escape any fine because it was the first to admit and “provide crucial evidence” of illegal collusion to the European Commission. The outcome above is a real world example of the prisoner’s dilemma. In this example, confessing to the collusion is both Sotheby’s and Christie’s dominant strategy, and had they both confessed at the same time, both companies would have most likely split the fine. The example above therefore shows that price-fixing through collusion is a short term game and that one player, in this case Christie’s, is most likely to pursue its own game and break away from the collusion in order gain immunity and avoid a potential fine.
Christie and Sotheby’s collusion also demonstrates that with the hike in buyer’s premium during the 1990s, bidders would have changed their behaviour and adjusted their initial bids. With the increases in buyer and seller premiums, there is a lack of transparency in the bidding process of the English auctions that both Sotheby’s and Christie’s operate under. As a result, we are more likely to have seen higher final bids during this period of collusion given the higher initial premiums and therefore potentially greater profit margins for both Christie’s and Sotheby’s.
Sources:
http://seanrocha.com/slate/how-art-auctions-work/
http://news.bbc.co.uk/2/hi/entertainment/2375667.stm